AIG CEO Martin Sullivan: Act II: Finding a New Balance

Imagine trying to fill Hank Aaron’s shoes. Or Wayne Gretzky’s skates. Or assuming Lawrence Olivier’s stage presence. Your predecessor is a household name. You are not. He also had a terrific run-up over 38 years. You had to spend the first year of your tenure-sometimes catching a few hours between 4 a.m. and 6 a.m. on your office couch as the only respite between crises-putting out a five-alarm scandal. Never mind the long term. But there is another side in your favor. Your management style of openness and inclusiveness sets you apart. Your predecessor’s charm often disarmed, but he could also terrify. Your approachableness earns you accolades from the troops. Your push for greater transparency and disclosure sits well with regulators, who became suspicious and investors, who tired of the old, inscrutable ways.

Martin J. Sullivan moved into one of the most prestigious jobs in the corporate universe when he succeeded Maurice “Hank” Greenberg, who became CEO in 1968 and took AIG public a year later. Since then, the company’s growth has been explosive, earning Greenberg iconic status as an uber CEO who opened doors in world markets and magically produced stunning returns to shareholders. The legacy came to an end in 2005 when Greenberg became the most prominent casualty of a tougher regulatory climate.

When AIG‘s board named Sullivan, who had been vice chairman and COO, to become the company’s third-ever CEO since its founding in Shanghai in 1919, he had his work cut out for him. In the first months of his job, he had to clean up after the Katrina disaster and the accounting scandal that destroyed shareholder value and called into question the quality of AIG‘s earnings.

The silver-haired CEO, the son of a Ford plant foreman in Dagenham in east London, moved quickly to settle with the regulators and to reform internal policies. AIG has gone from a target of shareholder activists to becoming something of a role model of governance reform and disclosure. Sullivan, who was born in London‘s Stepney district, grew up in Britain, and joined AIG in 1971, is a man of humble roots, informal and gregarious. He is also mindful that the company’s entrepreneurial culture and flair for risk-taking is at the heart of what makes the firm unique.

“It’s not his style to beat up on people,” says an AIG executive. “He’s respectful of other people’s strengths and weaknesses.” Says another, “Martin is very consultative, but he is also decisive. He will say, I want everybody’s opinion,’ but he knows when to stop and make a decision.”

That said, Sullivan faces challenges. For starters, the share price- now stalled in the high 50s-should be at least $90 or higher. AIG is one of the most undervalued big cap stocks in the market today, with a market cap that’s under its historic peak of $200 billion. The company, which trades in 130 countries around the world, needs to leverage its global brand. Sullivan must also review AIG‘s asset allocation model to ensure the sustainability and quality of earnings.

He has two major advantages: One, he inherited a well-oiled machine. AIG is not a cash flow underwriter. It doesn’t give underwriters any credit for investment income. The cash goes to the investment division that is judged on its own performance. Two, AIG, in contrast to, say, Citigroup, has a reputation for sticking it out in emerging markets. It is also positioned to be the market leader and the most profitable insurer in China. It is the fourth-largest insurer in Japan and, with 3.4 percent of the market, there is much roomto grow.

AIG trades in 130 countries, but in many markets it’s a minor player. Sullivan has his eye on elevating its insurance and retirement product offerings in such places.

When a general proffered a certain officer for field promotion to Napoleon, the French emperor waved off the usual recitation of accomplishments with the question, “But is he lucky?” Martin Sullivan is indeed lucky in one important detail. Having been with AIG for 35 years, he knows the culture firsthand-including what it’s capable of producing and what it cannot. He comes as an insider with an outsider’s perspective-no small thing for a CEO in his position. And he isn’t afraid of breaking with the past. His relation with AIG‘s board, now with six new members, is in contrast to his predecessor’s; and his working relationship with its nonexecutive chairman, Frank Zarb, demonstrates that change can be quick and decisive.

Q&A

Sullivan sets his own course.

With Katrina and the accounting scandal behind him, Martin Sullivan is transforming AIG while holding on to its entrepreneurial roots. The following are excerpts from a conversation with him in his New York office.

Coming in as a new CEO affords an opportunity to view everything afresh. Were you tempted to make wholesale changes or hold steady?

There were a number of issues that we had to address when I took this position in March 2005, but the underlying principle of the strategy that had been laid out wasn’t being questioned. The real issue for us going forward is how we leverage the overall diversification of AIG, which differentiates us from the rest. In fact, our geographic and product diversification demonstrated its true worth when we were hit by the effects of Katrina. For example, we learned from our success in retirement-related businesses in the U.S., such as AIG SunAmerica and AIG Annuity, and used this internationally. Initially, we focused on Japan and Korea, both from the fixed and variable annuity standpoint. Historically, we have done very well at transferring businesses to different parts of the world.

Another example is our D&O business, where we are No. 1 in the U.S. As legislation changed around the world, we determined we could leverage this strength internationally. We have a small, but reasonably good international consumer finance business that can grow at a much faster pace learning from our experience in the U.S.

We want to build on the core businesses of AIG (general insurance, life and retirement services, financial services and asset management), look at them on a more global basis and see where we can expand and whether it makes sense to do so. One of the things I always think about at 3 a.m. in the morning, amongst many other things, is, is there a fifth leg to the stool? Is there something else out there that would contribute to AIG‘s growth? It hasn’t presented itself yet, but we think about it constantly.

What about AIG opportunities in non-U.S. markets?

For us, China is going to be an important market in the years to come. We were born in China so we understand it very well, but it is something to be worked at constantly.

There was a period when I traveled to China four times in five months. We were very fortunate recently to have our provincial licenses granted in Guangdong and Jiangsu, which bring in about 170 million potential new customers.

In addition, India has been a success story for us, as has our partnership with the Tata Group. The frustration there is the foreign ownership restrictions, which hopefully will be addressed by the Indian government fairly soon. Given its size and growth, Brazil is also important. We have private equity and insurance operations in Russia, where we see growth opportunities over a period of time. Our strategy is to build distribution outside of Moscow and St. Petersburg. Other areas that we are growing nicely include Southeast Asia; we have over 29,000 life agents in Thailand.

What about greenfield areas?

We just got a license in the Republicof Georgia. We expanded ourbranch operations in Poland toLatvia and Lithuania. We alreadyhave businesses in Ukraine. Someask, why the Ukraine? Well, there are60 million people in the Ukraine andmore and more of them have disposable income. They are beginning tolook at insurance as a way of growingtheir life and retirement benefits.

In modifying its governance practices in the wake of the settlements with the government, what change do you feel most benefited the company?

The disclosure in our K and Q statements has been much more detailed, as is the information given in the supplemental data. In our third quarter 2005 conference call, we actually ran out of questions from the investment analysts because our transparency and level of disclosure was fairly comprehensive.

In addition, we amended our bylaws to allow majority voting, split the roles of chairman and chief executive and set mandatory retirement limits among other reforms.

Splitting the roles of chairman and CEO is something your predecessor would never have accepted. Would you advise your fellow CEOs to give it a try?

For me, it is fine. It is a British thing. I’m very familiar with the Higgs and the Cadbury Reports, which both affirmed the principle of splitting the role of chairman and CEO. In my case, the real issue is the nonexecutive chairman and the CEO. Working with Frank Zarb, our nonexecutive chairman, has been a pleasure and certainly has not interfered with running the business. It’s allowed me to focus on driving the business forward. It is a change that will evolve, over time, in corporate America.

Most CEOs don’t get six new board members in the first year of their tenure. How has this changed CEO/ board dynamics for you?

Given the headlines AIG was getting from March through July of last year, it’s atestament to this organization that we were able to attract people of the caliber of George Miles, Morris Offit, Mike Sutton, Bob Willumstad, Fred Langhammer and Jim Orr.From my perspective, the board has been very supportive.

No matter how well you have been trained, no one is trained to handle the set of circumstances that we walked into when I took office. I have relearned something that I always knew-that this company is very resilient. We came through the crisis in pretty good shape owing to the culture of the organization and the determination of the team to stick together.

We are back to being very focused- not that we lost focus-but we have fewer distractions. From my perspective, it was exhilarating, but we are better for coming through the experience with people who dedicated their lives to the organization. That couch you are sitting on has been used many times by me and others in the wee hours of the morning to recharge the batteries. I’ll let others opine on whether that changed me or not. I simply tried to lead by example. It was an experience for which you would not aspire to be trained.